The threat of fraud faces all organisations, not least those in the charity sector. The economic downturn and a climate of job insecurity is still being felt in the charity sector and has led a sharp rise in fraud in the sector over the past few years. In 2013, the National Fraud Authority* (NFA) reported that 10 per cent of charities with an income of more than £100,000 per annum had fallen victim to fraudulent activity of some kind and in 2014 it was estimated that fraud was costing the charity sector £1.65bn a year – an increase of half a billion since 2011. Alarmingly, the NFA concluded through their investigations that there is a substantial under-reporting of fraud in the charity sector.
Why and how are charities vulnerable?
The values that charities operate and rely upon allow them to enjoy high levels of public trust and confidence. Appearing to be associated with a charity can give a criminal enterprise a veneer of respectability.
Many charities are small to medium sized organisations and are heavily reliant on only a few professionals or volunteers to supervise or manage funds and assets. A reliance on cash based fundraising and the assumption of goodwill associated with charities are characteristics which are unique to the sector and leave it vulnerable to both organised fraudsters and opportunists alike.
Charities with an international element may face also face an increased risk of financial abuse from fraud or theft due to the complexity of working overseas.
Types of Fraud
Charities are a target for fraudsters in a number of ways and can become susceptible to both internal and external risks.
- Income-related fraud: where people within or connected to a charity attempt to divert funds for personal use or other non-charity purposes. Examples include: claiming inappropriate expenses; false accounting; and impersonating a charity and redirecting the income collected to a fraudulent body.
- Expenditure fraud: may arise in the circumstances outlined above. Examples include: claiming non-existent, over inflated or inappropriate expenses or overtime; misusing charity credit cards for personal expenditure; creating false invoices in order to obtain payment from the charity for goods or services that have not been supplied.
- Property and investment fraud: includes the fraudulent use of charity vehicles; siphoning off fuel and claiming for unnecessary or overpriced repairs; transferring charity funds to an organisation with which a trustee or employee is connected.Fraudulent fundraising in the charity’s name: usually involves misrepresenting to the public or other donors the destination of funds, or the amount going to a named charity.
- Fraudulent invoicing and grant applications: making false or inflated application to a charity to win service contracts or misapplying grant funding in breach of trust and contract.
- Identity fraud/theft: involves the creation of false identities in order to justify fraudulent payments.
- Corporate identity fraud: occurs when a bogus company is set up, or a genuine company’s details are used without authorisation to facilitate unlawful activity.
- Banking fraud: involves fraudsters setting up direct debits and standing orders to transfer money from legitimate charities to their own bank account.
- Gift aid fraud: Claims are made to HMRC to reclaim the income tax that donors have paid on the amount donated in respect of a donation that has not been made.
Many charities operate a restrictive budget so it can be difficult to allocate extra resources to improve counter-fraud measures. However, when taking into the consideration the astronomical cost of fraud to the sector, the benefit of careful investment to combat fraud arrangements can far outweigh the costs.
Awareness and Prevention
Whilst the risk of fraud will never be completely eradicated, implementing the following anti-fraud measures will protect your organisation against avoidable risks.
Financial controls and governance measures
Increasing awareness amongst trustees, staff, volunteers of the risks of fraud within the charity, implementing strict controls and clear procedures will help to increase security. Designating staff at appropriate senior levels to take responsibility for fraud prevention policies and promoting a whistleblowing culture that ensures a clear procedure for reporting fraud will equip staff and volunteers with the means to report any suspicions.
Controlling access to buildings, assets and systems using secure or unique logins and passwords, as well as setting out clearly defined roles for trustees and staff which segregate duties and delegate financial responsibilities will help to aid accountability.
It is important to ensure that basic records of all income and expenditure are kept with relevant receipts, invoices and supporting documents where possible. It is good practice to regularly reconcile bank statements and other accounts and incorporate spot-checks on books and records.
We recommend conducting periodically auditing processes and procedures to ensure that financial controls are not being overridden, by-passed or ignored. Trustees, staff and volunteers who override any such arrangements (e.g. by pre-signing a blank cheque) can significantly compromise financial controls.
Developing a fraud risk assessment process that takes into account the types of fraud to which the charity is most exposed may also be beneficial when taking into consideration the size and structure of the organisation.
Suspected Instances of Fraud
Establishing a mechanism by which all instances of suspected and confirmed instances of fraud are recorded will help your charity spot emerging patterns, identify areas of risk, measure losses and build an evidence base if fraud is confirmed as having occurred.
Fraud policies and procedures should be clearly communicated to all staff, volunteers and trustees through team meetings and as part of an induction programme for new people will help to keep the team alert to any internal or external threats posed to the organisation.
What to do if your organisation becomes a victim of fraud
Whilst prevention is always better than cure, it is always a risk that at some point, your organisation will become subject to some level of fraudulent activity. In such instances, a robust response plan which outlines how investigations will be conducted and by whom, the people and organisations that need to be notified, and the process for handling internal and external communications is essential to limit and manage any level of damage caused by fraudulent activity. Being open, transparent and accountable, and showing that fast action has been taken may significantly reduce any negative impact on the charity’s reputation following the occurrence of fraud.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.